Iran oil trade skirts ship insurance ban

Iran is shipping oil to China, its top buyer, despite a row over freight terms, and Japan has taken steps to resume imports in August as Tehran finds ways to get around Western sanctions on ship insurance for its drastically reduced shipments.

European Union sanctions against Tehran have stopped European insurers, who dominate the marine insurance sector, from offering cover on Iranian crude. Industry watchers say the measure has proved to be the hardest hitting in the West’s arsenal of sanctions aiming to persuade Iran to abandon its nuclear programme.

The lack of shipping cover has already disrupted flows of Iranian oil to Iran’s major customers in Asia -China, India, South Korea and Japan – at a time when the EU has stopped buying its oil altogether.

Japan has completely halted imports in July because of the lack of shipping cover to avoid any risk of running afoul of sanctions, and China requested that Iran deliver oil on its tankers while bargaining hard about terms.

On Wednesday, industry sources said Japanese insurers were expanding their maritime coverage to allow more domestic tankers to transport Iranian crude and that Iranian shipments to China were flowing despite the dispute about terms.

At least 4 million barrels of Iranian oil from the July programme are on their way to Chinese refiners, said a Chinese crude trader familiar with the negotiations.

“Looks like the freight negotiations are not a package, but voyage by voyage,” said the trader, who declined to be identified due to the sensitive nature of the matter. He referred to talks between Chinese state refiner Sinopec and the National Iranian Tanker Co (NITC).

China plans to buy about 15 million barrels of Iranian oil in July, sources have told Reuters.

If all those barrels, worth some $1.35 billion, are loaded, China would account for nearly half of Iran’s total July exports, estimated at 1.1 million bpd.

Iran exported at double that rate in 2011.

China alone more than halved its Iranian crude imports in the first quarter of 2012 due to a dispute over contract terms, which won it an exemption from U.S. sanctions. Imports recovered in April.

NITC wants Sinopec to pay a premium to use its tankers since the Iranian shipper is handling the insurance, but the Chinese refiner is seeking a lower freight rate. The arrangement the two firms struck to keep the oil flowing is unclear.

In Japan, insurers have increased their cargo and hull cover for tankers carrying Iranian crude to 39 billion yen ($491 million), up 30 percent from an initial plan unveiled in April, said industry sources.

That would allow two supertankers, instead of one, to transport Iranian oil through the Middle East Gulf at one time and boost the country’s capacity to ship from Tehran to more than 200,000 barrels per day. Japan is Iran’s third-biggest oil buyer after China and India.

Japanese insurers are limited in the amount they can provide in cargo and hull insurance, which protects ships and their contents against physical damage, because they can no longer share the risk with the Western-dominated reinsurance market.

The expansion in hull and cargo insurance follows Tokyo’s unprecedented move last month to provide up to $7.6 billion in cover against pollution and personal injury claims, also known as protection and indemnity (P&I) insurance, for shipments.

Japan’s Iranian crude imports fell by a third in the first five months of this year to an average of around 246,000 bpd despite an increase in Japan’s overall demand, data from the country’s Ministry of Economy, Trade and Industry has shown.

Like China, India has also been forced to rely on Iranian tankers to deliver crude. South Korea, the last of Iran’s top four Asian customers, has stopped importing from Tehran altogether.

In Europe, Turkey remain the only large customer but it has also slashed imports drastically.